Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Faroe and Lisa Abramowitz. Join us each day
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Speaker 1: every second year, in every minute. Right now at these
Speaker 1: meetings of the World Bank and International Monetary Fund, an
Speaker 1: annual visit with David malpass outgoing President of the World Bank,
Speaker 1: and instead of talking World Bank affairs, aid to the world,
Speaker 1: and the struggles of the war in Ukraine, we will
Speaker 1: hearken back to mister melpass this moment of seven and
Speaker 1: O eight. More than anyone in this building and set
Speaker 1: of buildings, he lived front and center at bear Stearns
Speaker 1: previous financial collapse. David, thank you so much for being
Speaker 1: with us. I'm not going to ask you an easy
Speaker 1: question like does it allude back to O eight right now?
Speaker 1: But the stresses that you see right now in American banking,
Speaker 1: in the huge tensions between China and the United States.
Speaker 1: Does it lead to that word suddenly where suddenly things
Speaker 1: can change as they did in O eight Hi Tom
Speaker 1: Hi everyone. So there were big there was a maturity
Speaker 1: mismatch going on then too, and it maybe from the
Speaker 1: same causes. Remember in the two thousands, interest rates were
Speaker 1: being raised very slowly, and so that built up a
Speaker 1: giant maturity mismatch, which some companies were funding with repose
Speaker 1: funding treasuries, so in the treasury bonds, and so in
Speaker 1: that way it hearkens to now we have in the
Speaker 1: US banking system some banks are funding treasury bonds with
Speaker 1: the posts. But a big difference now is the biggest
Speaker 1: duration mismatch is the Federal Reserve itself. It funds with
Speaker 1: users overnight borrowing to fund a giant bond portfolio some
Speaker 1: nine trillion dollars, the European Central Bank eight trillion dollars.
Speaker 1: And I think the dominant feature now is the asset
Speaker 1: allocation that came out of that. If you have giant
Speaker 1: buyers of long maturity of duration, in effect, the central
Speaker 1: banks were buying giant duration. And so what that meant
Speaker 1: is it distorted all world markets. And we're now in
Speaker 1: the workout phase there'll have to be a normalization of
Speaker 1: interest rates. It means pressure on asset prices for a
Speaker 1: long period of time. That's what's showing up in the
Speaker 1: meetings here. The expectation that they'll be weak growth for
Speaker 1: a while put pressure on people in developing countries throughout
Speaker 1: the world, and that pressure is getting intense. Frame the
Speaker 1: distinction between the World Bank weak growth call and that
Speaker 1: of your colleagues at the International Monetary Fund. Both of you,
Speaker 1: to editorialize, have been grim. What's the mail passion level
Speaker 1: of grim in your forecast? Ours are a little weaker
Speaker 1: than the IMFs, but remember they often do one in
Speaker 1: purchasing power parodies, so if you adjust for that, there's
Speaker 1: not that much difference. We use market based exchange rates,
Speaker 1: and so ours is two and there's I think would
Speaker 1: work out to two point four. So they're both week
Speaker 1: week forecast for twenty twenty three, and that's showing up.
Speaker 1: In the US. You saw the Federal Reserves saying maybe
Speaker 1: in the US recession mild recession in the second right.
Speaker 1: What's great about this is mail pass uses a slide
Speaker 1: rule from Colorado College, very killed. So this is growth.
Speaker 1: Let's talk about debt. If we can. This is something
Speaker 1: you've been really outspoken about, David, over the last few years.
Speaker 1: China the world's biggest creditor to paw nations. I understand
Speaker 1: there's been some conversations this week. What's that now, if
Speaker 1: we could start that, and then if you could tell
Speaker 1: me whether you're satisfied with it. The debt has grown
Speaker 1: up over the years. The composition of the debt is
Speaker 1: different from in the old days. That used to be
Speaker 1: US banks that were lending to foreign countries. Now we
Speaker 1: have China and the euro bond market lending to developing
Speaker 1: countries sovereign debt. So there was extensive talk yesterday. I
Speaker 1: co chaired with Crystallina the debt roundtable. China came at
Speaker 1: the level of the PBOC governor and also the Ministry
Speaker 1: of Finance of China and so they participate in the
Speaker 1: discussion and there was there were some agreements. There was
Speaker 1: agreements that there needed to be more timeliness of the
Speaker 1: launching into a restructuring process, that there needed to be
Speaker 1: data sharing. China's asked from the beginning, can't we get
Speaker 1: the data earlier? That hasn't been the tradition, but that's
Speaker 1: going to be and there's a there's a paper to
Speaker 1: do that. Also a working group which is important on
Speaker 1: the technicalities of burden sharing. How do you have equal
Speaker 1: burden sharing among creditors so that they all participate in
Speaker 1: the restructuring process of the debt. This is really important
Speaker 1: to the people in developing countries because their governments are
Speaker 1: paying these large, high not low interest rate kind of
Speaker 1: market rate or above market rate debt and it means
Speaker 1: it's draining the countries of what they need for nutrition,
Speaker 1: for health, for education, for climate adaptation. Are you satisfied
Speaker 1: with what China is committed? So would you need to
Speaker 1: see more? We need to see this week and it
Speaker 1: was mentioned last night. Yesterday there were big meetings, so
Speaker 1: we had the G twenty meeting, the G seven meeting
Speaker 1: of finance ministers, the Development Committee, the governors of the
Speaker 1: World Bank met and expressed strong support for the World
Speaker 1: Bank leadership. There were and there was discussion at the
Speaker 1: G twenty even late last night of the specific countries
Speaker 1: that needed to get action on debt relief. Zambia was here.
Speaker 1: I had a panel earlier this week with the Zambian
Speaker 1: finance Minister, the Ethiopian finance minister, they're burdened by high
Speaker 1: levels of debt. So the proof is in the pudding.
Speaker 1: The details of is Zambia going to get an mu
Speaker 1: we'd like to see one this week. China needs to
Speaker 1: be willing to sign off on the structure of the restructuring.
Speaker 1: One big question has been transparency and a lack of it,
Speaker 1: and a lack of understanding of just how much debt
Speaker 1: China has extended to in a lot of developing nations.
Speaker 1: Do you walk away from the meetings yesterday with a
Speaker 1: greater sense of how much debt they currently have tied
Speaker 1: to the developing world. We know quite a bit about it,
Speaker 1: but not the full extent. And there were calls yesterday
Speaker 1: and there's specific discussion of this that some people say
Speaker 1: swap lines by China into banks should be left out
Speaker 1: of the restructuring. Some say it should be included in
Speaker 1: the restructuring. There was talk about what to do with arrear.
Speaker 1: So as these restructurings drag on, the interest on the
Speaker 1: interest goes up and up, So can you agree in
Speaker 1: advance on how to handle that? And so it gets
Speaker 1: straight into the details. There was a there was a
Speaker 1: proposal made that it well the proposals across the board
Speaker 1: on how to handle this. So I think there's lots
Speaker 1: more work to be done, but at least there's a
Speaker 1: technical or a workshop that's going to be set up
Speaker 1: to bring people up to speed on how you calculate
Speaker 1: net present value reduction within a debt restructuring. Would you
Speaker 1: identify this and everything we've just discussed over the last
Speaker 1: few minutes as these number one issue that you'll hunt
Speaker 1: it obit to your successor at the World Bank? Well,
Speaker 1: certainly debt transparency is a giant issue. There was there
Speaker 1: was a call yesterday for the debt or countries to
Speaker 1: release the contracts that have non disclosure clauses. So that's
Speaker 1: a specific thing that will be that will outlast me
Speaker 1: and it's not going to get resolved this week, but
Speaker 1: I hope it does. You know, the the China is
Speaker 1: written into the contracts non disclosure clauses. That was specifically discussed.
Speaker 1: So as we look toward the future, I think what
Speaker 1: I'm handing over to my successor is a World Bank
Speaker 1: that's in really good shape. That was that was a
Speaker 1: main theme from yet from yesterday's meetings, but also in
Speaker 1: a developing world that's under this giant pressure from too
Speaker 1: much debt but also not enough growth coming out of
Speaker 1: the advanced economies. Well, this won't be the end of
Speaker 1: our conversations. You know that. It's great to catch up,
Speaker 1: divid ass always diapid malpass. Next to see the president
Speaker 1: some of the world banks right now, an annual visit
Speaker 1: as we do with these meetings with Gida Gopinath's first
Speaker 1: deputy Managing Director at the International Monetary Fund, and once
Speaker 1: you she has done critically in the last ninety days
Speaker 1: is drive forward the discussion of crisis and monetary policy
Speaker 1: and how we're going to extract ourselves from this math.
Speaker 1: Doctor Gopenath, thank you so much for joining this morning.
Speaker 1: You mentioned buried in your wonderful essay this scary idea
Speaker 1: that inflation becomes unanchored. Is inflation unanchored at this point? No,
Speaker 1: not at this point. I think if you look at
Speaker 1: the data, it's queerly anchored, and the US and Europe
Speaker 1: and several other countries. That is not a consent right now.
Speaker 1: The concern right now off of the five year forecast.
Speaker 1: It's your fault. We all know that. But the IMF
Speaker 1: five year forecast that we have three percent or even lower.
Speaker 1: The World Bank even set a little bit lower means
Speaker 1: a disinflation, it means a lower rate regime. If we
Speaker 1: haven't an unanchored or an anchor disinflation, does that lead
Speaker 1: to financial stability within your forecast? If inflation expectations the anchor,
Speaker 1: there are multiple problems associated with that. Firstly, interest rates
Speaker 1: go up. Policy rates have to rise much faster to
Speaker 1: bring inflation down, and that can generate much greater financial
Speaker 1: stress than we have seen with consequences not just for
Speaker 1: the country where the tightening is happening, but if you're
Speaker 1: a large economy with spillover to the rest of the world.
Speaker 1: So that could be very consequential. And it's one of
Speaker 1: the downside scenarios we have in our world economic outlook,
Speaker 1: which is if interest rates have to go up much
Speaker 1: faster and you have much more tightening, you could end
Speaker 1: up with global growth going as low as say one percent,
Speaker 1: which is would be very bad. So what is the
Speaker 1: nominal GDP separation of the IMF five year forecast? Is
Speaker 1: it for a dropping disinflation or lower inflation and with
Speaker 1: it lower real GDP bringing us down to a truly
Speaker 1: subdued nominal GDP now we have. Our expectation is that
Speaker 1: inflation will be conquered in over time. It's not going
Speaker 1: to happen immediately, but if you go into twenty twenty four,
Speaker 1: you're going to see inflation around the world getting much
Speaker 1: closer to central bank targets. Real growth is going to
Speaker 1: slow also because we don't have any China's anymore that
Speaker 1: are growing at very high rate. So for the global
Speaker 1: economy as a whole, we don't have very large engines
Speaker 1: of growth, so that's generating the weakness and real growth.
Speaker 1: Also because we have aging demographics, so unless we can
Speaker 1: find a way to raise productivity, you know, we are
Speaker 1: going to struggle with low growth. How controversial has your
Speaker 1: call been that inflation is going to get back down
Speaker 1: to where it was close to pre pandemic even by
Speaker 1: twenty twenty four. You know, if you look at focus
Speaker 1: and if you look at market expectations in the US,
Speaker 1: you see an even more rapid fall in inflation that's expected.
Speaker 1: So we are actually on the side of being a
Speaker 1: little more cautious about how long it's going to take
Speaker 1: to bring inflation down, but we think the policies will work.
Speaker 1: There's been some very substantial increase in interest rates we
Speaker 1: are seeing now that show up in terms of high
Speaker 1: frequency data, this slowing of the economy, and we think
Speaker 1: that will bring down inflation, but it will take time.
Speaker 1: Do you think that the balance of risks has shifted
Speaker 1: since what we saw with silicon valid banking, with some
Speaker 1: of the other banking institutions, and the huge dropoff in
Speaker 1: lending that we've seen periphery in initial data, that the
Speaker 1: balance of risks has shifted to perhaps have monetary officials
Speaker 1: be a little less aggressive when it comes to great
Speaker 1: hikes and to err on the side of pausing or
Speaker 1: even cutting. As always, central banks need to take into
Speaker 1: account how economic conditions look, and with the financial stress,
Speaker 1: you've had a tightening in financial conditions, bank lending standards
Speaker 1: have tightened, smaller banks, credit has weakened and will slow
Speaker 1: the economy down to some extent, which is why central
Speaker 1: marks may have to do less. But again, I think
Speaker 1: we're still waiting for more data to show up to
Speaker 1: know exactly how much of an effect that's Hey Agata,
Speaker 1: there's a bit of tension between what the IMF has
Speaker 1: communicated this week and what politicians have responded with Chancellor
Speaker 1: Hunt told us yesterday that he disagrees with your forecast.
Speaker 1: He's entitled to disagree with it. I spoke and we
Speaker 1: spoke to to be a Sadrian literally in the last hour,
Speaker 1: and he said he sees evidence of lending bank lending
Speaker 1: contracting in America. Secretary Yellen says she didn't see evidence
Speaker 1: of that. How'd you explain the daylight between what your
Speaker 1: institution is saying and what politicians are saying back? So, firstly,
Speaker 1: I think if you look at the numbers, we're not
Speaker 1: that far apart. Right. So, for instance, in the case
Speaker 1: of the UK, I think what Jeremy Hunt would recognize
Speaker 1: is that we've actually had a substantial upgrade for UK
Speaker 1: for this year. It's just that we haven't gone as
Speaker 1: high as maybe some of the other focus. We've actually
Speaker 1: seen things turn out better than expected in the UK.
Speaker 1: In the case of credit conditions, again, I think the
Speaker 1: difference is that Tobias was pointing to all of credit supply,
Speaker 1: not just from the large banks, and so you see
Speaker 1: that in the smaller banks, you see certainly credit supply slowing,
Speaker 1: but if you look at the large banks, indeed credit
Speaker 1: is holding up. See don't believe the Treasury sectary is
Speaker 1: misleading us when she says things like she doesn't see
Speaker 1: evidence of bank lending contracting. I think that's the description that,
Speaker 1: especially if you look at large banks, you're seeing credit
Speaker 1: holding up. Is an accurate representation again of the data.
Speaker 1: At this point, I look at where we are and
Speaker 1: I wonder of the textbooks and the theory that's out there.
Speaker 1: It seems like everybody's post pandemic supply driven dynamics making
Speaker 1: it up as they go, and the day to day
Speaker 1: Gopeneth grind is putting together the Blue Bug the world
Speaker 1: economic outlook. How much are you relying on a traditional
Speaker 1: economics versus going it's a whole new world after all? Well,
Speaker 1: I think there are pots that are new, and then
Speaker 1: there are parts that are old and stay the same.
Speaker 1: So we're using a combination of models, but also going
Speaker 1: beyond is our start and valid model? Right now? You
Speaker 1: and I are going to be with Olivia Blanchard tomorrow.
Speaker 1: He's trumpeting the dynamics of our start. Is it useful?
Speaker 1: Is there an efficacy traditional to traditional John Williams economics start?
Speaker 1: I think it's a very useful input in thinking about
Speaker 1: how to fashion monetary policy. And also fiscal policy. I
Speaker 1: think again, it's an input you cannot be that cannot
Speaker 1: be the only thing one is focused on. I think
Speaker 1: that's what the pandemic in the war is not. A
Speaker 1: lot of people say that this group of meetings is
Speaker 1: somewhat different in nature than previous ones, just because we
Speaker 1: feel like we're on the precipice of some sort of
Speaker 1: turning point, either back to what we came from or
Speaker 1: something new. How would you characterize it in terms of
Speaker 1: how these meetings are different? I think this meeting is
Speaker 1: different to the extent that I think we are in
Speaker 1: this period where after all the marshal policy tightening that's happened,
Speaker 1: we are seeing the effect of it. Because we know
Speaker 1: all this tighting works with a lag, So I think
Speaker 1: this is the lag and we're seeing it play out now.
Speaker 1: There are concerns about how this could play out. You know,
Speaker 1: as of now, financial policy tools have worked well in
Speaker 1: being able to calm markets, but there are risks that
Speaker 1: are out there. The second aspect is we are looking
Speaker 1: at a period where growth in the world is not
Speaker 1: going to go back to the three point eight percent
Speaker 1: it used to be, but more three percent. And lastly,
Speaker 1: we have many vulnerable economies around the world with very
Speaker 1: high levels of debt and could be in debt to stress.
Speaker 1: So you know, I think we have to all, first
Speaker 1: of all, recognize that the world economy did better than
Speaker 1: expected last year. It showed much strong resilience. We still
Speaker 1: have tight labor markets, consumption spending is still holding up.
Speaker 1: But that said, the balance of risks are squarely to
Speaker 1: the downside. That last point so important. Up in a
Speaker 1: half of the MFA to thank you. As always, it's
Speaker 1: going to catch up and going to see it. Parlor
Speaker 1: Gentle Learney joint us. Now that E Commissioner for Economy
Speaker 1: and Financial's Commissioner, good morning, good morning. We won't to
Speaker 1: talk about you. They don't worry about it. I want
Speaker 1: to talk about something much more difficult. Let's start with
Speaker 1: this question. Does Europe have a coherent approach to China?
Speaker 1: And if you do, what is it? Well? I think
Speaker 1: we do have. This is the obvious answer. It is
Speaker 1: evolved this attitude since three four years Our attitude until
Speaker 1: three four years ago was the attitude of well, we
Speaker 1: have important trade relations and whatever they are, we will
Speaker 1: strengthen this relations. Now I think we are very clearly
Speaker 1: on the perspective to rebalance these trade relations. Who also
Speaker 1: leave behind a certain ingenuity that we had in hoping
Speaker 1: that this trade relations in themselves would be in an
Speaker 1: equal treatment in a level playing field, which was not
Speaker 1: completely the case. So we are still cooperating economically, but
Speaker 1: we have also a geopolitical perspective which is of course
Speaker 1: quite different from China, and it is the perspective of
Speaker 1: our partners and US and the Western I wonder, how liar,
Speaker 1: if your view commission is different to the view of
Speaker 1: the French President. I'll share some of his language with
Speaker 1: political the weekend. He said, the great risk that you're
Speaker 1: a faces is that it gets caught up in crises
Speaker 1: that are not ours. He's talking about China and Taiwan
Speaker 1: and potentially just following whatever the United States does. Do
Speaker 1: you agree with that sentiment. No, I agree on the
Speaker 1: fact that we should avoid this kind of crisis. But
Speaker 1: of course if this crisis occur, we know which side
Speaker 1: we are in. I look at Italy and I have
Speaker 1: to bring this up. In an American football this would
Speaker 1: be called an audible. I'm going to change gears here
Speaker 1: on what's unspoken. The stunning statistics and you as former
Speaker 1: Prime Minister of Italy can speak to this of a
Speaker 1: birth rate in Italy post pandemic. It takes you back
Speaker 1: to eighteen sixty one. The demographic driving forces that we
Speaker 1: face at these meetings are enormous. Are we depeopling the
Speaker 1: Western world? I think we run a risk. I think
Speaker 1: this risk particularly clear in Europe, especially in Eastern Europe,
Speaker 1: but indeed also in my country and other European countries.
Speaker 1: How do we face this challenge? Well, I think we
Speaker 1: should continuously look to our perspective in a not only
Speaker 1: in a horizontal way. I mean Europe and its big
Speaker 1: eastern neighbor Europe and Russia. Right, we need vertical way.
Speaker 1: Knowing that Europe, the Mediterranean, the Arab world, Africa, this
Speaker 1: clock will have in twenty fifty two point five billion
Speaker 1: people and we need cooperation legal mygration. This is of
Speaker 1: course joined with internal policies that are increasing geography. This
Speaker 1: is the solution. Well, the European experiment forward has to
Speaker 1: be and I'm percolating out there is an optimism about
Speaker 1: a better nominal GDP for Europe. Do we still have
Speaker 1: eurosclerosis or should I say the risks of eurosclerosis or
Speaker 1: view broken free of that, as Joan mentions with a
Speaker 1: new relationship with China among others. Well, I think, well,
Speaker 1: we love living in Europe. I think it's we are
Speaker 1: proud of our values, our culture, but we should not
Speaker 1: think ourselves and if possible, the world to Europe as well.
Speaker 1: What a beautiful place with such a good values, wonderful culture, etc.
Speaker 1: Because Europe is also the place where innovation happens. Are
Speaker 1: you using a new nominal GDP in Europe? Have you
Speaker 1: broken free from the euros courosis theme of decades? I
Speaker 1: think there is a chance to do so. Why there
Speaker 1: is this chance because I think, for the first time,
Speaker 1: the europe I mean, in this case, the European Union
Speaker 1: is thinking itself as an actor on the global race
Speaker 1: to innovation, to clean technology. What in our brass language
Speaker 1: we call strategic autonomy is something completely new for Europe.
Speaker 1: Our idea of the European economy was until three four
Speaker 1: years ago, the idea of a economic single market based
Speaker 1: on competition and open trade full stone. Now the European Union,
Speaker 1: with plans of strategic autonomy is a European Union fighting
Speaker 1: for innovation. Just quickly here, how much is that new
Speaker 1: vision at odds with a vision that the United States
Speaker 1: has in terms of a cohesive trade relationship with China
Speaker 1: and a cohesive trade relationship across the Atlantic. Well, I
Speaker 1: think we should be recognizing the fact that we will
Speaker 1: have in the coming years a sort of race to
Speaker 1: clean technology in the world, a race with the US,
Speaker 1: a race among the economic global player, a rice for subsidies.
Speaker 1: The problem is to avoid that this become a race
Speaker 1: for subsidies. And the risk is this to avoid is
Speaker 1: that this undermine the relation with our partners. I'm very
Speaker 1: optimistic from this point of view because with the Americans,
Speaker 1: with Canada, with other countries, with Japan, we cooperate very well.
Speaker 1: Everyone recognize that Europe has the right and the duty
Speaker 1: to provide security to its own supply chains of the future.
Speaker 1: I think that this is clear for all our partners.
Speaker 1: So the problem is how we participate to this phrase
Speaker 1: for clean technology without transforming it in a subsidies war
Speaker 1: and in a tension among partners, and without transforming this
Speaker 1: in a reduction of global trade. Difficult balance to find.
Speaker 1: But if we don't find this balance, if we don't
Speaker 1: have global trade for an economic block that like the
Speaker 1: European Union. Yeah, it's a big problem. Commissioner, thank you,
Speaker 1: Thank you very much. Politant to learning that. The Area
Speaker 1: Commissioner for Economic and Financially Fast Tobias Adrian is Director
Speaker 1: of Monetarian Capital Markets at the IMF. What that means
Speaker 1: he's in charge of the green book and all around
Speaker 1: financial stability here. He has enjoyed a recent American banking crisis.
Speaker 1: You people put out PhD fancy spider charts which show
Speaker 1: the different factors that are of challenge right now, Which
Speaker 1: spider chart in Which factor in that chart matters right now? Yeah?
Speaker 1: So I think what we have seen in recent months
Speaker 1: is that banking stocks have sold off quite a bit,
Speaker 1: in particular in US and Europe, but the market more
Speaker 1: broadly has been fairly stable. So financial conditions have tightened
Speaker 1: to some extent, but it's really in the banking sector
Speaker 1: that we have seen most of the tightening, and that
Speaker 1: could have consequences down the line. For microactivity. I want
Speaker 1: to go to your work at m I two with
Speaker 1: Olivia Blanchard. He's all the rage. He's my book of
Speaker 1: the summer with wonderful difference equations on our starred folding.
Speaker 1: The theory right now to the hardcore pragmatic realities of macroeconomics.
Speaker 1: Does theory matter right now? Does our start matter? Absolutely.
Speaker 1: We published a chapter just earlier this week that is
Speaker 1: looking at our star and in our assessment, and that
Speaker 1: is very much aligned with what the market pricing is
Speaker 1: telling us as well, is that interest rates are going
Speaker 1: to come down in the medium term. Of course, at
Speaker 1: the moment they elevated, center banks have to fight inflation
Speaker 1: and then have to keep monetary policy tight. But over
Speaker 1: time we do expect interest rates to come back down
Speaker 1: to our star, which we estimate to be similar to
Speaker 1: pre COVID. Do you think we've seen evidence that this
Speaker 1: banking system can't handle interest right to close to five
Speaker 1: percent of the Federal Reserve. There's certainly stress in the
Speaker 1: banks and in the non banking system. Right We have
Speaker 1: seen turbulens in both banks and non bank financial institutions.
Speaker 1: And there's always a distribution of how much exposure there
Speaker 1: is to interest rate risks, to duration risk, and some
Speaker 1: of the weaker players have been under tremendous stress, and
Speaker 1: there's certainly possibilities that further stress could be triggered at
Speaker 1: some point. Clearly, there were some badly managed institutions, and
Speaker 1: we won't talk about them individually, but one FED officials
Speaker 1: said earlier this week that he does not think that
Speaker 1: it was because the Federal Reserve went from zero to
Speaker 1: five in twelve months. Is that an assessment that you share?
Speaker 1: So I don't think it's the speed per see that
Speaker 1: is at play here, But I do think that the
Speaker 1: rise in interest rates has been putting pressure on institutions.
Speaker 1: That these unrealized losses, which are in the public domain
Speaker 1: and which have made headlines around the events over the
Speaker 1: past month, Well, do you think, just to sort of
Speaker 1: put a bow on this, do you think that the
Speaker 1: stress shows that it is not worth it to necessarily
Speaker 1: raise rates further from here and cause that sort of
Speaker 1: more systemic stress in order to more rapidly get inflation
Speaker 1: back down to where it was pre pandemic. So the
Speaker 1: first order goal for center banks at the moment is
Speaker 1: to bring inflation back to target. I think there's no
Speaker 1: question about that, and both the US policymakers and the
Speaker 1: Swiss policymakers have been very successful in deploying other tools
Speaker 1: to ensure financial stability. There were aggressive actions in terms
Speaker 1: of lending and deposit insurance to contain any fallout, and
Speaker 1: that allows monetary policy to continue to tighten to fight inflation.
Speaker 1: Inflation is a big problem and inflation has to come
Speaker 1: back to target. We've talked a lot about trying to
Speaker 1: separate two things, financial stability from a monetary policy fighting inflation.
Speaker 1: They're getting a little fuzzier, especially from the minutes where
Speaker 1: clearly you have FED officials pulling back from some of
Speaker 1: the rate hikes. Do you think that a credit crunch
Speaker 1: is disinflationary? They're certainly going to be an impact from
Speaker 1: the higher cost of capital of banks on their bank
Speaker 1: lending behavior. We have numbers in the GFSR. We estimate
Speaker 1: that to be about zero point four five percent in
Speaker 1: the US and the similar magnitude in Europe. So there
Speaker 1: is going to be an impact in our assessment from
Speaker 1: bank lending on real output, and that of course is
Speaker 1: going to feed back into monitor policy decisions. Absolutely. Okay,
Speaker 1: So basically, do you think that right now developed markets
Speaker 1: should not raise rates further and that they should just
Speaker 1: tolerate inflation being higher perhaps a bit longer, with faith
Speaker 1: that it will get back in the eye rest view
Speaker 1: to where it was pretty pandemic. So We don't have
Speaker 1: the definite answer yet. It depends on releases around inflation.
Speaker 1: There could be upside surprises to inflation that may need
Speaker 1: further tightening of monetary policy. So you know, policy going
Speaker 1: forward is very much dependent on data, in particular on
Speaker 1: how core inflation evolves. Let's talk about the data that
Speaker 1: might influence how core inflation evolves. Have you seen evidence
Speaker 1: that credit is contracting the bank lending is contracting in America? Oh? Absolutely.
Speaker 1: We have seen a couple of data releases that have
Speaker 1: shown a certain amount of tightening in credit underwriting standards
Speaker 1: as well as in the overall level of credit. Can
Speaker 1: I be blunted? Then? What on earth was State Treasury
Speaker 1: secretary talking about earlier this week? So I would distinguish
Speaker 1: a baseline and an address scenario, and I think the
Speaker 1: Treasure Secretary was talking about the baseline. When you look
Speaker 1: at markets, you know, the market implied inflation is coming
Speaker 1: back to show it fairly quickly. You're being kind because
Speaker 1: I think she said she saw no evidence of lending contracting,
Speaker 1: and you've said, we do. Yeah. Absolutely, there's certainly evidence
Speaker 1: in the data of some contraction and lending and some
Speaker 1: tightening of lending. Standards at least, So what a situation
Speaker 1: some real daylight again between the IMF and we're all
Speaker 1: looking at the same data, and the politicians and the
Speaker 1: Treasury Secretary and the IMF is one example. Chancellor Hunt
Speaker 1: is another example of the same thing. Although that's a
Speaker 1: bad projection and not realized information. But still we dismissed
Speaker 1: that as politics. But I would love you your answer
Speaker 1: without to bus what the policy implications are of the
Speaker 1: politics of not reflecting the pain that is likely to
Speaker 1: occur when you get the policy prescription that you think
Speaker 1: is necessary to bring down inflation. So absolutely, I think
Speaker 1: monetary policy is being tightened, and that is partially transmitted
Speaker 1: through bank lending. That's the classic bank lending channer. And
Speaker 1: you know, to get information down, of course, economic activity
Speaker 1: has to come down to some degree. We're out of time.
Speaker 1: But I've got one real important question. I'm going to
Speaker 1: bounce off Robin Wigglesworth's wonderful tour to force on debt
Speaker 1: in China and restructuring today and the ft. Just simply,
Speaker 1: if China is reticent to join the West in restructuring debt,
Speaker 1: does that change your financial stability? So many countries are
Speaker 1: in debt restructuring negotiations, and there are many players that
Speaker 1: are important. You're mentioning one of them, and for those
Speaker 1: countries it is extremely first order to get the debt
Speaker 1: restructured for the moment. The countries dat are impacted are
Speaker 1: smaller countries, so relative to global capital markets, I think
Speaker 1: that will not lead to broader contagion. The basis is wonderful.
Speaker 1: Thanks for waking up early, miss. Right now, this is
Speaker 1: a joy. As you well know, there were one hundred
Speaker 1: and forty two books written on the crisis of seven
Speaker 1: o eight oh nine, and singularly definitive was fault Lines
Speaker 1: as we face new fault lines now. The author was
Speaker 1: Rag and Roger of the University of Chicago Boost School,
Speaker 1: and is follow on book. The third pillar was my
Speaker 1: book of the summer ages ago. The former head of
Speaker 1: the Indian Central Bank joins us this morning, and we
Speaker 1: could go for two hours rago, and we don't have
Speaker 1: it because I know, I think you're heading for the airport,
Speaker 1: so let's get right to it right now. Olivier Blanchard
Speaker 1: is looking at dynamics of our starting growth. The developed
Speaker 1: worlds looking at this the emerging market world and their
Speaker 1: fragilities are looking at it right now. How close are
Speaker 1: we to an instability of where we need to be
Speaker 1: versus the growth rate we're going to we hope to see. Well,
Speaker 1: we have still a economy in the US which is
Speaker 1: not landing right, it's chugging along. The first quarter looks
Speaker 1: pretty good. The problem is more with the medium term.
Speaker 1: What happens when all the stimulus plays through, What happens
Speaker 1: when the stimulus from the Inflation Reduction Act plays through
Speaker 1: to be slowed down? And what you're seeing in many
Speaker 1: emerging markets is a lot of damage done by the pandemic,
Speaker 1: which is also going to hold them back going forward
Speaker 1: in terms of consumption. For example, the lower middle class
Speaker 1: deeply hurt during the pandemic. Slowly recovering, but it's going
Speaker 1: to take time. And of course we've got all these
Speaker 1: overheads such as the tariffs, the deglobalization, the conflicts, the
Speaker 1: attempt to so in terms of longer term growth, it
Speaker 1: doesn't look good. I think the IMF exactly right. Longer
Speaker 1: term growth looks a lot worse. Of course, where our
Speaker 1: star settles after that, there are conflicting forces, the IMF
Speaker 1: says low Larry Summer says Hi, My sense is low
Speaker 1: that yes, you may get an inflation premium tacked onto
Speaker 1: the real interest rate. There is equilibrium, but it's not
Speaker 1: going to go back to high levels. Roger Tim from
Speaker 1: Cupertino emails and thanks for watching this morning, Tim, and
Speaker 1: he says, China in India, you are the number one
Speaker 1: expert we have in the world on the dynamics of
Speaker 1: these two great nations versus a new America. Explain to
Speaker 1: us how you see twenty four months out Washington, Beijing
Speaker 1: and all of India. Well, I would hope that we
Speaker 1: don't go down the path we're on with between Washington
Speaker 1: and Beijing. That's the key relationship in the world that
Speaker 1: is fracturing. I hope they talk more. They're not they should.
Speaker 1: That's important for the rest of the world because if
Speaker 1: you have to choose sides, countries will be in a very,
Speaker 1: very difficult position. Of course, there is hope that some
Speaker 1: country like India will take up the growth engine from China.
Speaker 1: That's not going to happen for a long time. India
Speaker 1: is one fifth the size of the Chinese economy. Even
Speaker 1: if India grows at you know, historic China like growth rates,
Speaker 1: which is which is still ways away and it needs
Speaker 1: to do a lot to get there. India is not
Speaker 1: going to be a substitute for China. What is important
Speaker 1: is India do what it does really well. India could
Speaker 1: be a big exporter of services. You're seeing service exports
Speaker 1: in India go through the roof. And these are things
Speaker 1: not just it exports. These are new forms of services.
Speaker 1: For example, consulting services being produced from India's not just
Speaker 1: the back office of old it's new consultants actually facing clients.
Speaker 1: It's lawyers facing clients. That's I think a mode for
Speaker 1: the future that's going to help growth across the world.
Speaker 1: Bring us here to the here and now. Back in
Speaker 1: two thousand and five, you're the head of the IMF
Speaker 1: Economics Department and you warnt about a banking crisis. Larry Summers,
Speaker 1: at the time Treasure Secretary called you a luddyed. Do
Speaker 1: you think that we are in the precipice of some
Speaker 1: sort of financial crisis or significant credit crunch that is underappreciated.
Speaker 1: I think we're not over yet. How bad it gets
Speaker 1: we will have to see. I think this problem is
Speaker 1: more systemic. We sort of putting it on a few banks,
Speaker 1: right These are the guys who splurged, you know, they
Speaker 1: didn't do the right thing. The fact is, when you
Speaker 1: have quantitative easing of the kind we had in the pandemic,
Speaker 1: you know, Federal Reserve expanding its bannsheet tremendously. What happens, well,
Speaker 1: commercial banks also have to expand their bannsheet. They expand
Speaker 1: it by issuing uninsured demand deposits. Uninsured demand deposits went
Speaker 1: up by trillions of dollars during the pandemic and they
Speaker 1: haven't come down. So the sources of fragility are there. Right,
Speaker 1: you're bringing down reserves, but these guys still have a
Speaker 1: lot of demand deposits out there now we've seen that.
Speaker 1: Of course, where those deposits were invested also matters, if
Speaker 1: they were invested in long term you know, securities. You're
Speaker 1: seeing those losses per me through the banandsheets or the banks,
Speaker 1: and there will be problems going forward. The question is,
Speaker 1: as you pointed out earlier, how does this play out
Speaker 1: in terms of the credit crunch which is coming. Are
Speaker 1: their substitutes? Does private credit, for example, pick up some
Speaker 1: of the slack from the banking system. That's a big unknown.
Speaker 1: But accidents, I think we can't say we're overall our
Speaker 1: credit crunch is inherently disinflationary. They are, they are. I
Speaker 1: mean they're going to tighten. So you could argue supply side,
Speaker 1: demand side, right, but I think the net effect is
Speaker 1: disinflationary typically, So yes, it will do the Fed's job
Speaker 1: a little for it, but the FED doesn't know if
Speaker 1: it's coming. The FED doesn't know how much. And right now,
Speaker 1: you know, while the numbers look good, you're still looking
Speaker 1: at things like services inflation, which is still strong. So
Speaker 1: the Fed count relax at this point on the inflationary front,
Speaker 1: even though you know from the credit front it probably
Speaker 1: should be a little software. You were really moved by
Speaker 1: your interview Rug, Who's colleague Luigi Zingallis frame that with
Speaker 1: the professor from both school group think? The fate of
Speaker 1: the Federal Reserve on both monetary policy and on regulation.
Speaker 1: Do you think the institutions like the one we're in
Speaker 1: right now this morning, the Federal Reserve, which we talk
Speaker 1: about often, still suffers from group think? And if you do,
Speaker 1: how on earth are we going to address that? Look,
Speaker 1: I think the one thing that seems to be off
Speaker 1: the table and the discussions is the role monetary policy
Speaker 1: has played in creating financial fragility, Right, we've sort of
Speaker 1: put that off the table. We don't talk about it
Speaker 1: at all. And you have to believe that three crises
Speaker 1: in two decades it has to have played some role.
Speaker 1: And to put it off the table and say, look,
Speaker 1: it's the private sec it's the financial sector doing it's stuff.
Speaker 1: They've got bad incentives. Well, that's part of the problem.
Speaker 1: That's not the entire problem. Now we're saying supervisors were
Speaker 1: also private from what about monetary policy? What about for example, quee?
Speaker 1: Wasn't that part of what created the frigility that in
Speaker 1: fact we're seeing now, And that's why we need organizations
Speaker 1: like the IMAP to start talking. They're very hesitant to
Speaker 1: complain about central banks of the industrial world because those
Speaker 1: guys have more economists than the IMF. Sometimes I hate
Speaker 1: Unfortunately we're out of time and I could talk about
Speaker 1: this all day, but it's the establishment of view still
Speaker 1: dominates the conversation, and I think that this institution that
Speaker 1: we're lucky enough to sit in this morning is it's
Speaker 1: part of the problem on that front. It needs to
Speaker 1: make a bigger argument. Rock around Racha always fantastic Thank
Speaker 1: you Rocky, Thank you Racky Racha at the University of Chicago,
Speaker 1: but it's school. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify,
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